Regulators to Utilities: We’ll Let You Rate Base Your Cloud Computing

Regulators to Utilities: We’ll Let You Rate Base Your Cloud Computing

Investor-owned utilities are finally starting to embrace cloud-based software. But investing in a cloud-based solution reduces the need for servers -- thus cutting capital costs -- making it less attractive to rate base.

Utility regulators across the country are aware of this conundrum, and are looking at ways to fix it.

According to a new Oracle survey of 76 staffers and commissioners at the country’s state regulatory agencies, 54 percent are looking at “changing their categorization of cloud investments from O&M to capital expenses in the future.” 

That's compared to the 15 percent of respondents who told Oracle that their agency already treats

Investor-owned utilities are finally starting to embrace cloud-based software. But investing in a cloud-based solution reduces the need for servers -- thus cutting capital costs -- making it less attractive to rate base.

Utility regulators across the country are aware of this conundrum, and are looking at ways to fix it.

According to a new Oracle survey of 76 staffers and commissioners at the country’s state regulatory agencies, 54 percent are looking at “changing their categorization of cloud investments from O&M to capital expenses in the future.” 

That's compared to the 15 percent of respondents who told Oracle that their agency already treats the cloud-based software as a capital expenditure today. The trend is in keeping with a broad level of support for making it easier for utilities to harness the efficiencies of cloud computing, and save everyone money.

Only about one-third of respondents said their regulatory bodies have a “specific and comprehensive strategy" for cloud investments at present; although half have some kind of activity underway to manage it. But 87 percent of respondents named it as an important technology trend to monitor closely. And of the rulings that regulators made on cloud computing, nearly twice as many came out in favor of it (40 percent) as against it (21 percent). 

Regulators are also clear on why they support the move to cloud computing. Three-quarters of respondents named flexibility as a key driver. 

Whether it’s in managing multi-million smart meter deployments or integrating distributed energy resources into their day-to-day operations, utilities are being asked to adapt to more changes in the coming decade than they’ve faced in the last century. Regulators named meter data management (46 percent), big data analytics (41 percent), and distribution and network automation (36 percent) as their top categories of interest.

So how can regulators turn cloud computing into capital expenditures?

“Simply interpreting existing regulatory accounting rules is the best approach for regulators who want to level the playing field for utilities,” wrote Oracle. (The company, of course, has a large suite of cloud-based utility software products, like its DataRaker MDM platform and its Opower customer engagement and analytics suite.)

The New York Public Service Commission (PSC) took this approach last year, building on a practice of adding prepayments to utility rate bases. In Illinois, utilities are asking the state’s commerce commission to consider a scenario in which a cloud computing contract is held like a patent or copyright. 

This could be a big deal for investor-owned utilities, which are already investing heavily in the cloud. In a January 2016 survey of 100 utility executives, Oracle found that 45 percent were using cloud computing, and another 52 percent were planning on it in the near term.

Utilities are also moving quickly in certain key software applications. Over the next three years, nearly nine in 10 utilities intend to use the cloud for meter data management solutions and data analytics, while seven in 10 are planning cloud-based business intelligence and distribution and network automation.

But with regulatory support for these kinds of cloud applications comes a certain amount of regulatory scrutiny. Four out of five respondents said that regulators should have some role in how utilities roll out cloud computing, citing the need to manage customer data security and maintain guidelines in how utilities interact with third-party cloud providers.

Not all regulators were on board with the move to capex the cloud. One-third of respondents said that if that cloud computing is an O&M expense, "and it should stay that way.”

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